Gold pulls back on a stronger Dollar as market sentiment falters

• Gold eases with the US Dollar favoured by the fragile market mood. 

• US Yields remain depressed on hopes that the Fed will signal a dovish turn on Wednesday. 

• XAU/USD needs to break the $2,400 resistance to cancel the broader bearish structure.

Gold price (XAU/USD) is going through a moderate pullback on Monday’s European morning, weighed by a stronger US Dollar (USD), after finding resistance around the $2,400 earlier in the day. News reports that the Middle East conflict might spill into Lebanon are keeping investors on their heels and providing a competitive advantage for the safe-haven USD.

Geopolitical risks are overshadowing the highlight of the week, which is the Federal Reserve’s (Fed) meeting, due on Wednesday. The Personal Consumption Expenditures (PCE) Prices Index data for June, as seen on Friday, showed that inflation remains sticky, although at levels near the central bank’s 2% target. Investors remain hopeful that the easing cycle will start in September, and that the Fed might give hints on that direction after this week’s meeting.

On Tuesday, the US JOLTs Job Openings data for June and the Conference Board’s Consumer Sentiment Index for July are expected to show a moderate softening, adding to the case of a September rate cut.

Daily digest market movers: Gold buyers take a break as the fundamental picture muddles  

• Increasing geopolitical concerns, with Israel considering an attack in Lebanon, are fuelling the safe-haven US Dollar and weighing on Gold.

• US benchmark 10-year Treasury yields are trading lower on the back of increasing hopes that the Fed will start cutting rates in September.

• The CME Group’s Fed Watch tool is pricing a 95% chance that the Fed will keep rates on hold on Wednesday and a 100% chance of rate cuts in September.

• On Tuesday, the Conference Board is expected to show that the Consumer Sentiment Index declined to 99.5 from 100.4 in the previous month.

• Also on Tuesday, the US JOLTS Job Openings are expected to show a decline to 8.03 million in June from the 8.14 million openings seen in May.

Technical analysis: XAU/USD is capped below $2,400 with the immediate bullish bias intact

XAU/USD’s recovery from last week’s lows at around $2,350 has been capped at $2,400. This is an important resistance area as the 100-period Simple Moving Average (SMA) at the 4-hour chart meets downtrend resistance from the 17 July highs at that level,  but downside attempts remain limited for now.

The intraday RSI shows a moderate positive momentum, with the $2,380 level holding bears for now. Below here, the next target is the July 25 low, at $2,350. On the upside, a confirmation above $2,400 would cancel the broader bearish structure and put $2,430 into focus.

 

Risk sentiment FAQs

What do the terms'risk-on' and 'risk-off' mean when referring to sentiment in financial markets?

In the world of financial jargon the two widely used terms “risk-on” and “risk off'' refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.

What are the key assets to track to understand risk sentiment dynamics?

Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.

Which currencies strengthen when sentiment is 'risk-on'?

The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.

Which currencies strengthen when sentiment is 'risk-off'?

The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.

Gold FAQs

Why do people invest in Gold?

Gold has played a key role in human’s history as it has been widely used as a store of value and medium of exchange. Currently, apart from its shine and usage for jewelry, the precious metal is widely seen as a safe-haven asset, meaning that it is considered a good investment during turbulent times. Gold is also widely seen as a hedge against inflation and against depreciating currencies as it doesn’t rely on any specific issuer or government.

Who buys the most Gold?

Central banks are the biggest Gold holders. In their aim to support their currencies in turbulent times, central banks tend to diversify their reserves and buy Gold to improve the perceived strength of the economy and the currency. High Gold reserves can be a source of trust for a country’s solvency. Central banks added 1,136 tonnes of Gold worth around $70 billion to their reserves in 2022, according to data from the World Gold Council. This is the highest yearly purchase since records began. Central banks from emerging economies such as China, India and Turkey are quickly increasing their Gold reserves.

How is Gold correlated with other assets?

Gold has an inverse correlation with the US Dollar and US Treasuries, which are both major reserve and safe-haven assets. When the Dollar depreciates, Gold tends to rise, enabling investors and central banks to diversify their assets in turbulent times. Gold is also inversely correlated with risk assets. A rally in the stock market tends to weaken Gold price, while sell-offs in riskier markets tend to favor the precious metal.

What does the price of Gold depend on?

The price can move due to a wide range of factors. Geopolitical instability or fears of a deep recession can quickly make Gold price escalate due to its safe-haven status. As a yield-less asset, Gold tends to rise with lower interest rates, while higher cost of money usually weighs down on the yellow metal. Still, most moves depend on how the US Dollar (USD) behaves as the asset is priced in dollars (XAU/USD). A strong Dollar tends to keep the price of Gold controlled, whereas a weaker Dollar is likely to push Gold prices up.